Proposed SEC Rules Regarding Securitization Representations and Warranties Would Impose Extensive Disclosure Requirements on All Securitizers

The Securities and Exchange Commission (the “SEC”) has proposed rules¹ that would require securitizers to disclose, both at issuance and on an ongoing basis, all fulfilled and unfulfilled asset repurchase requests for all of a securitizer’s asset-backed securities (“ABS”) trusts over a five-year period, including repurchase requests made prior to the effectiveness of the new rules. In addition, the SEC has proposed rules requiring nationally recognized statistical rating organizations (“NRSROs”) to include in any rating report a description of the representations, warranties and enforcement mechanisms available to investors, and how they differ from representations, warranties and enforcement mechanisms in issuances of similar securities. These rules are mandated by Section 943 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was signed into law on July 21, 2010,² and which requires the SEC to adopt final rules no later than 180 days after enactment of the Act.

The rules requiring disclosure by securitizers would include a new Rule 15Ga-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which would require the filing of a new Form ABS-15G. Each filed Form ABS-15G would include a tabular summary of all unfulfilled, fulfilled and pending repurchase requests made during the five-year period preceding the filing. The required disclosure would not be limited to repurchase requests made by the securitization trustee or another party having a contractual right to request repurchase; repurchase requests made by investors would also be required to be disclosed. Securitizers would be permitted to indicate by footnote, if applicable, that the securitizer had been unable to obtain from the trustee all information regarding investor repurchase requests made prior to the effective date of the new rules.

The proposed rules would apply not only to publicly registered ABS as defined in Regulation AB, but also would require disclosures for all issuances of “asset-backed securities” as newly defined by the Dodd-Frank Act (“Exchange Act ABS”). Exchange Act ABS encompass a much broader range of instruments than “asset-backed securities” under Regulation AB, including all securities, whether offered publicly or privately, that are collateralized by self-liquidating financial assets that allow the holders to receive payments based primarily on the cash flows from those assets. Among other things, Exchange Act ABS include collateralized debt obligations, securities issued or guaranteed by a government sponsored entity such as Fannie Mae or Freddie Mac, and municipal ABS.

Rule 15Ga-1 would apply to all “securitizers,” a definition also added to the Exchange Act by the Dodd-Frank Act which generally includes ABS sponsors and depositors.³ However, for transactions where the sponsor and depositor are affiliated, only the sponsor would be required to make the required disclosures.

A Form ABS-15G would be required to be filed via EDGAR by every securitizer, for every new ABS offering in which the transaction documents provide a covenant to repurchase or replace an underlying asset for breach of a representation or warranty. Initially, the securitizer would be required to provide the repurchase history for the last five years by filing the Form at the time the securitizer or its affiliate first offers or organizes an offering of Exchange Act ABS after the rule’s effective date. Thereafter, Form ABS-15G would be required to be updated and filed monthly, until the last payment has been made on the last Exchange Act ABS outstanding and held by a non-affiliate of the securitizer.

As required by the Dodd-Frank Act, the requirements of Form ABS-15G would not be limited to successful demands for repurchase, but also would include disclosure of both pending and unfulfilled repurchase requests by the trustee, as well as repurchase requests made by any securityholder even if the trustee did not make a demand. Form ABS-15G would require disclosure in a tabular format by asset class, listing the names of all of the relevant issuing entities of Exchange Act ABS by date of formation of the issuing entity. The table would indicate whether any Exchange Act ABS of the relevant issuing entity were registered under the Securities Act of 1933, as amended (the “Securities Act”), and would require the securitizer to detail the repurchase statistics for each originator of underlying assets. For each originator and for each issuing entity, Form ABS-15G would require disclosure of the number, outstanding principal balance and percentage by principal balance of: assets that were the subject of a repurchase demand for breach of representations and warranties; assets that were actually repurchased or replaced; assets that were not repurchased or replaced; and assets that are pending repurchase or replacement (including a footnote that provides narrative disclosure as to why the repurchase or replacement is pending). Each of these number and principal amount disclosures would be required to be totaled by asset class.

In the Proposing Release, the SEC notes that Section 943 of the Act does not specify how it is to apply to offshore transactions, but proposed Rule 15Ga-1 would require reporting of all unregistered transactions by securitizers in the United States, including Exchange Act ABS sold outside the United States. Rule 15Ga-1 apparently also would cover private offerings of Exchange Act ABS in the United States by foreign securitizers, as the SEC acknowledges that the rule “may result in foreign securitizers seeking to avoid the filing requirement by excluding U.S. investors from purchasing portions of ABS primarily offered outside the United States.”

The SEC already proposed significant changes to Regulation AB in April 2010.⁴ Some of these proposed changes have been re-proposed to be consistent with proposed Rule 15Ga-1. The type of information required by Rule 15Ga-1 and Form ABS-15G would be required to be included in each prospectus for an offering of ABS registered under the Securities Act, and in each ongoing report on Form 10-D required under the Exchange Act for such a transaction, in addition to being required to be filed under Rule 15Ga-1. However, the required prospectus disclosure would only include a three-year, rather than five-year, history of the repurchase demands made relating to any of the securitizer’s offerings of ABS of the same asset class as the related offering. Further, the Form 10-D disclosure would include only repurchase demands related to assets in the relevant pool, rather than a comprehensive summary of all repurchase demands related to assets of the same class securitized by the securitizer.

The SEC has also proposed a new Exchange Act Rule 17g-7, which would implement the requirement of Section 943 of the Act that NRSROs make certain disclosures in any report accompanying a credit rating relating to Exchange Act ABS. Under the proposed rule, an NRSRO would be required to include a description of the representations, warranties and enforcement mechanisms and how they differ from those applicable to issuances of similar securities.⁵ This disclosure would be required for all Exchange Act ABS, whether sold in a registered offering or exempt from registration. For purposes of Rule 17g-7, a “credit rating” would include any expected or preliminary credit rating issued by an NRSRO, including those disclosed in pre-sale reports.

For assistance, please contact any of the following lawyers:

John Arnholz, Partner, Structured Transactions
john.arnholz@bingham.com, 202.373.6538

Reed D. Auerbach, Practice Group Leader, Structured Transactions
reed.auerbach@bingham.com, 212.705.7400

Jeffrey R. Johnson, Partner, Structured Transactions
jeffrey.johnson@bingham.com, 202.373.6626

Matthew P. Joseph, Partner, Structured Transactions
matthew.joseph@bingham.com, 212.705.7333

Steve Levitan, Partner, Structured Transactions
steve.levitan@bingham.com, 212.705.7325

Edmond Seferi, Partner, Structured Transactions
edmond.seferi@bingham.com, 212.705.7329

Charles A. Sweet, Partner, Corporate, M&A and Securities
charles.sweet@bingham.com, 202.373.6777

Roger P. Joseph, Practice Group Leader, Investment Management; Co-chair, Financial Services Area
roger.joseph@bingham.com, 617.951.8247

Edwin E. Smith, Partner, Financial Restructuring, Co-chair, Financial Services Area
edwin.smith@bingham.com, 617.951.8615